Workers Ownership and Profit-Sharing in a New Capitalist Model?

Henri Matisse - La Danse - 1909

Text excerpts from Freeman, R. B. (2015). WorkersOwnership and Profit-Sharing in a New Capitalist Model? (No. 267566). Harvard University & © Swedish Trade Union Confederation (LO) 2015

Richard B. Freeman holds the Herbert Ascherman Chair in Economics at Harvard University. He is currently serving as Faculty co-Director of the Labor and Worklife Program at the Harvard Law School. He directs the National Bureau of Economic Research / Sloan Science Engineering Workforce Projects, and is Senior Research Fellow in Labour Markets at the London School of Economics' Centre for Economic Performance.

The challenge of extreme inequalities

Capitalism today faces the specter of ever rising economic inequality and perennial financial crisis. The fruits of economic progress are increasingly concentrated on a small proportion of society – the upper 1 %, 0.1 %, 0.01 %, 0.001 %, all the way up to the Forbes billionaires. However fine the classification, the richest in each group gained the most over the past few decades. The transmission of productivity to the real wages of regular citizens that made capitalism work for all broke down, with no obvious market fix or political solution in sight. In the new world of financialization and globalization, it is unclear how advanced economies can restore trend increases in real wages, reduce or at least arrest the growth of inequality and share more equitably the benefits of modern technology and innovation or what, if anything, trade unions can do to help save the day. Less than a decade ago – before the implosion of finance, the great recession, sluggish employment recovery, and seemingly inexorable concentration of income and wealth – economic policy-makers and experts would have dismissed this assessment of the problems facing capitalism as the ravings of a mad hatter. Conventional thinking held that deregulated markets allocated resources and determined prices and wages according to competitive market ideals. New financial instruments had solved problems of risk. If, by chance, something went wrong in the macro-economy central bankers and finance ministers had the tools to restore full employment or tame inflation. In a crisis, the IMF could bail out an economy and guide it back to prosperity through judicious spending and investment policies. Globalization was said to benefit virtually everyone as long as markets were sufficiently flexible; and flexibility was readily attainable by weakening labor protections.

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The OECD warned that inequality had bad effects on society and on economic growth.The IMF reported that economies grew better with less inequality! At the 2015 Davos meetings, groups with diverse interests and ideologies worried about the future of a capitalist system with huge growing inequalities. Trade unions denounced “today’s business model” as bad for people but had no suggestions of how to change the model.”

This paper makes the case that the best path forward for capitalism is to increase workers’ stake in the capital of their firm and in capital ownership more broadly and that the best strategy for unions is to take a lead role in promoting this development. Increased employee ownership and profit-sharing is not the whole solution to inequality or financial instability or the other problems that afflict advanced economies. But it is a necessary part of any solution and the one with the greatest potential for moving market capitalism forward in ways that benefit all. Part 1 summarizes evidence that worker sharing in ownership or profits is a viable business model that can reduce inequality and improve economic stability. Part 2 examines the benefits and risks to unions from promoting an ownership model and contrasts a modern ownership/ sharing program with Sweden’s 1970s–1980s wage-earner funds. Part 3 reprises the main arguments.

Shared Capitalism Works for Firms and Workers

Firms in which workers have an ownership stake or share in profits are a normal part of modern capitalism. Tens of thousands of worker-owned firms operate in advanced economies. The firms range from John Lewis, the UK’s most successful retailer, to Spain’s Mondragon conglomerate to China’s giant high-tech telecom Huawei to the US’s 12,000+ ESOP companies with their 13 million worker-owners. Many high tech firms and start-ups have broad-based share ownership. Many large firms subsidize stock purchase plans and offer stock options for all workers. Profit-sharing or gain-sharing (where a firm rewards workers for achieving a group target) are extensive. As a result of these diverse practices, approximately 40 % of US workers have a stake in the operation of their firm. Despite the EU’s regularly endorsing greater worker financial participation in its PEPPER reports, sharing modes of compensation are less extensive in the EU than in the US.In Sweden about 11 % of firms and 43 % of the largest firms offer employees share ownership schemes, but coverage extends to only 5.5 % of employees. Approximately one fifth of all companies offer all-employee profit-sharing schemes, mostly through tax-privileged “profit-sharing trusts”.

How do firms fare when workers gain a larger share of rewards and decision-making? 

Per the section title, the preponderance of evidence shows that firms with workers ownership or profit-sharing do better along many dimensions than conventionally owned firms. Many studies focus on US experience, with sufficiently compelling findings to have convinced the Center for American Progress’s transatlantic Inclusive Prosperity Commission to endorse policies to encourage greater worker ownership and profit-sharing in 2015. But enough evidence exists for EU countries to show that the benefits of the shared capitalist business model are not uniquely American.

On the firm side, a 2007 UK Treasury commissioned study (Oxera, Oxford, London) found that firms that shared rewards with workers through individual employee stock ownership schemes had about 2.5 % higher value added per worker than otherwise comparable firms without a sharing program.
A 2014 US study (Blasi, Kruse and Freeman (2014)) of over 1,000 firms seeking to make Fortune’s annual 100 Best Companies to Work For found that a disproportionate number of the 100 Best had some form of sharing arrangements: 17 % were ESOPs, 10 % were majority employee owned, 16 % give stock options to most employees. 

The firms with more extensive sharing of rewards and workplace responsibility had high performance work practices and greater worker trust, which translated into higher market values relative to book value of assets.
On the worker side, the NBER’s Shared Capitalism study (Kruse, Freeman, Blasi, 2010) of over 41,000 workers in 14 firms found that more extensive employee ownership, profit and gain sharing, or broad-based stock options were associated with better outcomes for employees. Workers with a greater financial stake in company or group performance were especially likely to monitor other workers and to intervene to reduce the free rider behavior that plagues any group incentive system. More extensive sharing systems increased employee attachment, reduced turnover, and produced more employee suggestions for improvements.

What makes profit-sharing and employee ownership work are the workers, which opens the door for their unions to play a key positive role in these business forms.

To what extent might expanding employee ownership/profit-sharing restore the link between growth of productivity and growth of real earnings, reduce income inequality, and improve economic stability? 

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The most famous worker owned companies in Europe are Spain’s Mondragon, a conglomerate of workers cooperatives (each worker has one vote as owner) and the UK’s John Lewis, a 100 % employee owned trust that operates retail stores and groceries. In 2015 Mondragon collaborated with the US’s United Steelworkers to develop a union-cooperative Mondragon-style model appropriate to the US. During the great recession, John Lewis prospered, producing headline stories in the British press about the large profit paid to its employee-owners that would have gone to shareholders in conventional firms.

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Comparing employment fluctuations in the US in the 2008–09 recession and ensuing recovery, Kurtulus and Kruse (2014) find that ESOP firms reduced employment less in the downturn and increased employment less in the recovery than other firms, thus stabilizing employment over the cycle. Kurtulus and Kruse reference earlier studies of more modest cycles that give similar results and give evidence that suggests that ESOP firms survive longer but their data is not fine enough to determine whether the greater rate of exit among conventional firms is through mergers of buyouts or closure.